CEOs can use both signals and systems as powerful levers in tilting the focus of their company toward long-term societal value creation — which will take care of their shareholders perfectly well.

Setting a Personal Example

Because people in organizations watch what their leader does and follow suit, the CEO wields a powerful lever: modeling desired behaviors.

When P&G CEO A.G. Lafley insisted that in-home visits with consumers be arranged for him in whatever city he visited in the P&G worldwide network, executives throughout P&G realized that if the CEO wasn’t too busy to do in-home consumer visits, neither were they. When he worked with the board to get his stock-based compensation to vest in one-tenth increments in each of the 10 years following his retirement from P&G, his organization got the unmistakable impression that P&G was focused on the very long term and that obsessing about one’s own short-term compensation wasn’t very CEO-like. When he spoke only rarely about shareholder value and only then as utterly derivative of P&G’s performance on winning the consumer value equation and building powerful brands, P&G employees came to appreciate that while he cared about shareholder value, he saw it is an output of the things he aspired for P&G not a singular and direct goal.

Broader Corporate Signals

These personal behavior signals matter a lot, but a CEO can also use broader corporate signals — such as Lafley’s removal of the stock tickers that his predecessor had installed in every P&G office to get his employees to focus on shareholder value maximization. And while it may seem corny and irrelevant, adding “now and for generations to come” to the corporate statement of purpose helped employees understand that P&G had its eyes on the very long term: “We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come. As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper.”

Aligning Core Systems

However, signals can be undermined if key systems contradict the signals. In this respect, no system is more important than the performance-measurement system. Commentators tend to focus on performance-measurement systems because they drive compensation. But their importance extends far beyond compensation. Everybody wants to succeed and get a pat on the back. If the performance-measurement system says that you didn’t do a good job, you will be disappointed and you will make sure that you don’t get rated badly again — regardless of the compensation consequences.

When Lafley took over as CEO, he made a subtle but important but change in a core, senior-management, performance-measurement criterion. He changed “Market Total Shareholder Return” (M-TSR)” to “Operating Total Shareholder Return (O-TSR).” M-TSR measured the market return to shareholders based on the stock price appreciation plus dividends over a three-year period. In the system he inherited, performance in the top tertile of a pre-determined peer group triggered a performance bonus; so it was a number on which senior management focused. However, what Lafley noticed was that that a period of high M-TSR was inevitably followed by a period of low M-TSR because the high M-TSR was a result in a big, short-term positive change in shareholder expectations and once those expectations soared, it was well-nigh impossible to follow that with another bout of expectations increases.

O-TSR measured three elements associated with the long-term improvement in the value of the business: sales growth, profit margin improvement, and increase in capital efficiency. And importantly, O-TSR correlated strongly with M-TSR, but only over the long term, not the short term.

Use of O-TSR discouraged management from doing things that would hype short-term expectations and instead focused them on pulling the levers that ratcheted up long-term performance, to the benefit of the shareholders who were interested in P&G in the long run.

With a few critical personal and corporate signals twinned with an adjustment of the performance-measurement systems, any CEO can focus the firm on building long-term customer and societal value that pays off for the shareholders who want to be shareholders for the long term. Shareholders who have no interest in the long term should be treated as they deserve to be treated: like the societal parasites they are.

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